Macro Man

Prayer for the Day

noreply@blogger.com (Polemic) — Wed, 19 Jun 2013 06:44:00 +0000

Prayer for the day -

Our Ben,
Who art in heaven,
Hallowed Be-nanke,
Thy auctions come,
Thy Bill's be done,
In Twos as they are in Sevens,
Give us this day our daily Fed,
And forgive us our Treasuries,
As we forgive those that default against us,
And lead us not into recession,
And deliver us from deflation,
For thine is the borrowing, the easing, and the printing,
For ever and ever.
Amen.

We first posted here :- Order of Service, but so apt for today we had to reuse.

Buy, Buy, Miss the Rally and Die.

noreply@blogger.com (Polemic) — Fri, 14 Jun 2013 15:28:00 +0000

Team Macro Man turn to Don McLean to describe this year's trading.

A long long time ago
I can still remember
How the market used to make me smile
And I knew if I just bought bonds
I'd make some money being long
And maybe I'd be happy for a while
But Fed tapering made me shiver
with every ten year note delivered
Bad news in every headline
I couldn't buy one more time
I can't remember if I cried
When I saw punters swept out with the tide
Something broke me deep inside
The day the market died

So buy, buy, miss the rally and die.
I've waited for the data but the data weren't high
Talk the good old Fed's tapering QE's a lie
I'm singing this'll be the day that I buy
This'll be the day that I buy.

Did you write to Hilsenrath
And do you lunch on the Grapes of Wrath?
If Bernanke tells you so?
Now do you believe in Spooz and Blues?
Can I hedge by selling lots of 2's
And...can Aussie escape the noose?
Well I know that you're long dollar/yen
'Cause at 101 I stopped you in
You bought some RKOs.
Man both of those got hosed.
I was long the Nikkei, short the swiss.
With a dual digi, couldn't miss,
But I saw my p/l had pissed
The day the market died
We started singing

Buy, buy, miss the rally and die.
I've waited for the data but the data weren't high
Talk the good old Fed's tapering QE's a lie
I'm singing this'll be the day that I buy
This'll be the day that I buy.

Now for 5 years we have been repressed
And frankly I have been so depressed
But that's not how it used to be
When markets set the price of rates
And hedge funds didn't put up gates
And no one ever heard of Fed QE
Oh and when Bill Gross got the big bone,
He rang the Fed up on the phone
"Look I can't sell MBS
...come on, Ben, just buy the rest!"
And while Obama read a book on Marx
The people stormed Zucotti park,
And we sang dirges in the dark
The day the market died
And started singing

Buy, buy, miss the rally and die.
I've waited for the data but the data weren't high
Talk the good old Fed's tapering QE's a lie
I'm singing this'll be the day that I buy
This'll be the day that I buy

Helter skelter in a summer swelter,
My Bunds were saved with a put spread shelter.
One-four-five and falling fast...
And ten years blew through two-oh-eight,
I tried to fix my mortgage rate,
But the bank told me I'd have to wait.
Now the pre-Fed air was laced with doom
As the CIO cleaned out the room
We all got up to trade
Oh, but not a buy was made.
'Cause when I tried to receive DI's,
The trader wouldn't make my size.
And I couldn't beleive my eyes,
The day the market died

Buy, buy, miss the rally and die.
I've waited for the data but the data weren't high
Talk the good old Fed's tapering QE's a lie
I'm singing this'll be the day that I buy
This'll be the day that I buy

And there we were, all in one trade
Abenomics rules, our year is made
With no need to think again.
Moves were nimble, charts were sick,
Japan trades on the candlestick
And trends are Kuroda's only friend
And as I watched those JGBs
I felt a tremble in my knees
No angel born in hell
Could tell me when to sell
And as the stops were triggered in the night
In some sort of sacrificial rite,
I saw Schauble laughing with delight
The day the market died
And he was singing

Buy, buy, miss the rally and die.
I've waited for the data but the data weren't high
Talk the good old Fed's tapering QE's a lie
I'm singing this'll be the day that I buy
This'll be the day that I buy

I met a girl who sold the Blues,
And I asked her for some happy news
She just stopped out and went away
And I went down and sold some VIX,
Going back to my old tricks,
But my broker said that model wouldn't play
And in the street the traders teemed,
The brokers cried, and the journos dreamed,
But not a word was spoken,
The IB chat was broken
And the three men that I want gone
Draghi, Ben, Kuroda-san
They all agreed their work was done
The day the market died
So I'm left singing

Buy, buy, miss the rally and die.
I've waited for the data but the data weren't high
Talk the good old Fed's tapering QE's a lie
I'm singing this'll be the day that I buy
This'll be the day that I buy.

Kevlar gloves in AUD/JPY

noreply@blogger.com (Polemic) — Thu, 13 Jun 2013 10:19:00 +0000

Thought of the day - "The Market giveth and the Market inserts red hot pokers before dicing you into small chunks and spreading your remains to the four corners of the earth"

We know it's hard but we will try to move away from Emergegeddon for a moment, though we are fully aware of its dominant influences, to wonder about the JPY again.

Abe's bungee rope better hold as the asset plummet off the bridge is getting close to the critical point. TMM admit to being disappointed that there hasn't been anything more concrete from the Wizard and our fear that the spread between future expectations and reality would collapse has materialised. But though the percentage numbers being cited for falls is impressive, TMM like to look at the other axis of time when looking at corrections to longer term plays and on that measure we are only back to March on NKY. Oscillations around the mean of a reality maybe, but with confidence the key we do wonder what is needed to turn the short term tide? A friend of a friend of Kuroda whispering about burning JGBs perhaps?

Whilst we think that the Wizard of Abe's road to growth is long and tortuous and we are not sure it will ultimately reach the intended destination (debated before), the Wizard's horizon is long-term so he won't be chucking in the towel as swiftly as we have seen from money managers in this last move down. So feeling that the market is back either at (or below) the reality/expectation line, TMM are donning their Kevlar gloves and are looking to re-enter the Abe trade. But where? Nikkei? A bit maybe. but selling JPY currency again? Yes, but what should we sell it against?

USD? We are afraid that USD is about to remain soft as tapering is pushed further back across the table as markets and hence confidence falls (we think all this media talk blaming all the market falls on Bernanke's tapering certainty is the wrong way around) and we invoke our ISM rule of FED action. This leaves USD vulnerable.

EUR? Though we like Europe and the Euro in the medium term, once the German court case is behind us Dr Aghi can put down his Teutonic Monetary dictionary, stop talking German and revert to speaking Italian again, resulting in an overtly dovish Dr Aghi at the next ECB. This should temporarily undermine the Euro FX though give European assets a lift. So let's pass on Euro.

GBP? It's had a good run up already and is at risk of being Carneyised despite gently improving data so we'll avoid that too.

Now, here's a brave call. Aud. Our longer term outlook towards it remains bleak but we are watching with interest as there are a few signs that there may be a shorter term turn due. Despite an appalling jump lower in everything Chinese on its reopen, the Japan exit tsunami and the continued Emergegeddon, AUD/USD is about 200pts off its base of 2 days ago. High intraday volatility is also often a sign of a turn. As there is nothing that TMM like more than batting against a consensus, especially one that has moved so far already, despite our longer term fears towards Aus which remain intact, we chose to hold out our Kevlar gloved hands towards AUD/JPY and buy here.

TMM ft Emerging Market Fund Manager.

noreply@blogger.com (Polemic) — Tue, 11 Jun 2013 13:32:00 +0000

Continuing with the Emerging Market rave, eat your heart out "Swedish House Mafia ft Tinie Tempah with your Miami to Ibiza.

Here's Team Macro Man ft. Emerging Market Fund Manager with

Manilla to Floripa

He says he likes my Sharpe but wants it USD
I stay up all night watching SGD
He says he loves my trades as I lift CLP
And buy EM rated just Baa3
Earned my black BM with its COE
But Muddy asks what's hidin' in my SCB
I say ha! Wear your shorts and prep your DIP
Trading EM bonds is simple yield carry.

But Ohh ! Scream one! Everybody! Get out of your positions!
Pay attention and listen,
We're trying to get this out in one print,
So lets try and make that happen
Sell now! Action!

Hit the CME, they like my dealing fee
Tripped out of THB, caught nasty VND.
I'm out on PHP and Taiwan CNT.
Raving at TMM, London to NYC
Now looking for my visa and my Visa
Where's my driver? Can't cut it finer.
I'm up to my neck with the Korean regulator

You can find me on the table full of vodka and tequila
Surrounded by investors and they couldn't look much meaner.
Wake up in the morning with a Senate spawned subpoena
With a book like LTCM, It couldn't get much bleaker.

Patriot Act may get me or they catch me through FISA
'Cuz thats standard procedure from Manilla to Floripa.

TMM's Essential Mix: Emerging Markets

noreply@blogger.com (Polemic) — Tue, 11 Jun 2013 10:16:00 +0000

Coming live to you from Tanjong Beach Club in Singapore TMM, described as "the Swedish House Mafia of macro - minus the musical talent or good looks" will be bringing their mix of emerging market breaks - mostly of the fixed income variety.

And breaks are what TMM are seeing out here. More "going Pete Tong" than TMM. The emerging markets selloff which started out all groovy and house music (you know, gradual normalization of policy, markets with bad fundamentals doing vastly worse than those with good fundamentals ) but has instead turned into something that sounds like a Skrillex set with a bunch of scratched records. In short order we've seen a lot of EMFX blowup from ZAR to IDR. Now some people have observed that this is partly due to some forced deleveraging by CTAs and the like which should, all things being said, be temporary. Swap spreads should not be blowing out if the problem is the local markets as opposed to banks as in 2008. The problem is that this selloff appears to be gathering pace and, with an acute lack of risk appetite at dealers, it is hard to say where things are going to clear if redemptions come.

In addition, we are seeing some truly daft behavior from central banks most notably Bank Indonesia which is engaging in QE in a market with 6% inflation, good growth and no incipient signs of a credit slowdown. If the recent price action is the best they can do with regards to stabilization it is tantamount to waving a red cape at the likes of Druckenmiller and Scott Bessent at Soros both who a) know this game and b) won it last time.

In that context TMM are finding things fairly hairy out here. The possible good news would be measures to slow credit growth in places like Thailand where it appears to be going into the condo market more than anything else or, perhaps some of that long awaited reform in India. Or, perhaps, some real SOE reform in China. Instead when TMM talk to strategists pushing us to cover shorts in this space we find ourselves glazing over, imaginging we are talking to Vladimir and Estragon and in all fairness the daydream is not far from reality.

To that end, TMM are pretty happy staying underweight to short particularly in yield proxy equities and yield sensitive names.

Now, there is something TMM need to consider here and that is the underlying assumption of this whole market - decoupling, which ended *Really* badly last time. TMM are looking at USTs and equities and wondering just whether the rest of the world has given much thought to how likely a taper is given the S&P 500s international earnings and what they might look like if things got ugly.

EM isn't a rounding error any more and with US tech services at risk from foreign reactions to FISA and the Patriot act the risk reward does seem to be changing fast.

Chapter 9 - Monetary Medicine.

noreply@blogger.com (Polemic) — Fri, 07 Jun 2013 18:00:00 +0000

In the style of one of Team Macro Man's favorite Larson cartoons on Equine Medicine, one of our Macro Minors has created the Ben version.

Central Bankers and their Big Brass Balls.

noreply@blogger.com (Polemic) — Fri, 07 Jun 2013 04:59:00 +0000

A couple of weeks ago the world seemed pretty sure of how Ben, Abe and Dr. Aghi were playing their hands.

Ben's crowd were going to be tapering off on QE whilst Abe was going to do the heavy lifting from here on out and Dr. Aghi, having surgically removed the tail risk, was on look out and even preparing the ground for further easing and potentially negative interest rates to counter a dire European outlook. To that effect the obvious trades were to be long USD/JPY and Nikkei, gently short Euro, be long Euro Equities and to be starting to lighten up on US equities.

Then things started to go a little off course. US data become steadily poor enough for tapering of QE to be reconsidered and see the dreadful term "detapering" introduced - Here we would like to remind you of TMM's rule of ISMs - "Every time the ISM dips below 50, the Fed follows with an ease (rates or QE) "

To this end equities stopped sliding (temporarily) and started to respond inversely to bad US economic news and the Usd started to drift off, most noticeably in that most QE of crosses, Usd/Jpy.

But hope was at hand as the market waited for Abe to come to the rescue with Arrow 3, which was becoming all the more important because shake-downs in everything "Abish", though still being termed "healthy and corrective profit taking", were just starting to introduce elements of doubt as to the immediacy and uni-directionality of Jpy and Nikkei. If this slippage hadn't started occurring probably less necessity would have been attached to the potency of his 3rd arrow comments but as it was, the market didn't get a speech worthy of a Churchill or Eisenhower and as TMM alluded to in the last post, have started to worry that the all powerful Wizard may just be a small man playing around with levers, smoke and mirrors. So down we went again in Nikkei and USd/Jpy, already weak, was given another kicking.

But on the sidelines something else was happening. Carry trades in general had started to catch fire and the lack of guaranteed Japanese action set that nightclub without adequate fire exits that TMM have been warning about for a while, High Yield Emerging Market, alight and the few exits were getting more than a little busy.

So it now fell to the ECB where Dr Aghi's reputation for cool creativity has remained at "David Bowie" levels.

However expectations for a dovish ECB were smashed today. In particular, Draghi’s statement that “price developments should remain in line with price stability” sounded neutral and this sent EUR carry trades, especially Euribor contracts, south sharply, with a concurrent rally in the EUR. Meanwhile this was like a bucket of petrol over EM Bonds and the slits of exits couldn't cope. Italy and Spain were caught in the ECB / EM crossfire and both 10yrs put on 20+bp.

With it now looking as though the QE baton has been passed back to the US, Usd/Jpy and associated NKY then melted in the flames.

No wonder we have had such large movements with perception of CB policy in all three major areas changing within the space of a few days, leaving people worrying that Abe might not be Superman, Dr Aghi might not be Super Mario and Popeye Bernanke may have to go back on the Spinach.

But lets look at them one by one, first the ECB.

Now, TMM is puzzled by Draghi’s statement. Because despite Draghi’s proclamations, EU Inflation expectations are NOT close to the ECB mandate. Below is a chart of 5y EU inflation expectations. We are now at levels from last summer, and before that 2010. At 1.5% for 5 years, TMM thinks any rational observer would conclude that the ECB is missing its inflation target of ‘close to, but below 2%’ by a sizable margin.

A possible explanation is that the ECB is trying to exert pressure on EU politicians to continue fiscal reform efforts, which has eased of late. In the final paragraph of Draghi’s statement, he said: “the Governing Council considers it very important that decisions by the European Council to extend the time frame for the correction of excessive fiscal deficits should remain reserved for exceptional circumstances”. Whilst TMM remain comfortable that data in Europe IS bottoming and that tail risk is not there (despite the sudden resurgence in European periphery yields), perhaps we should be concerned that the ECB, without immediate emergencies (tail risk) to deal with could be back to operating within their normal confines of inflation targeting and, comparatively to OMT swift action, may be perceived to be becoming sluggish in response.

As one wit posted to us.. "*S+P DOWNGRADES DRAGHI BAZOOKA TO WATER PISTOL"

But TMM think that the usual oscillation in expectation and outcome for ECB meetings will result in a swing at the next event with Draghi producing a "more Dovish than expected" result.

So what about Abe? It's all about confidence and TMM have been wondering just how much of the past few months rallies in Nikkei and USD/JPY have been the result of expectation and how much due to real action. Because if he lets this one slip and confidence of success vanishes, then so will the expectation and we will retrace all of that component. Which we feel is most of it. So with that in mind TMM really don' t think he will drop the ball right now and he will put on a show next week.

And the US? We have been throwing around all sorts of arguments and analogies, most of them medical ranging from tearing off the plaster of QE as quickly and painlessly as possible, to continued methadone prescription, to amputation and stem cell therapy. Once again, as with Japan, it all rests on continued confidence and here we have a balance between confidence in the continued supply of liquidity if the economy needs it against confidence in long term Fed policy, the two being slightly different. The other point of confidence is who follows whom. the market the fed, the fed the data, the market the data or the Fed the market. We would prefer to think that the Fed will, as they keep stating "do what is necessary" (as the ECB also keep saying) to which point they will try and play the Goldilocks scenario of just the right amount for any situation.

We would like to remain confident that despite the wild oscillations in central bank expectations the central bank Governors are indeed Governors - Those big Brass Balled governors on the steam engine of the World's economy and they can’t afford to choke off what confidence may finally have emerged.

One could argue that if this is the case then the medium term outlook for equities is pretty flat as the governor functions operate, so selling 1650 straddles in S+P, particularly during this recent high vol may not be as mad as it may currently appear.

The fly in our ointment is Emerging Market fixed income, where positions are being burned alive. Could this become contagious? Well the most encouraging sign we have is that the countries suffering bond grief, such as Mexico actually had positive out comes in equities as that was happening. We are positioned for more grief in the likes of Indonesia and other structurally worrisome emerging markets that have been recipients of blind yield hunting, but don't think that the developed markets, with their brass balled governors are going to fall. In fact European equities are tempting us again.

Finally, to cap off a week of mayhem, we have the NFP lottery today. TMM won't put in a prediction other than to suggest it will "surprise".

The Wizard of Abe

noreply@blogger.com (Polemic) — Wed, 05 Jun 2013 07:16:00 +0000

Reaction to Abe's Third Arrow has been one of disappointment. Whilst we see him continuing to throw everything at it we are concerned that impressions are everything and if the market detects cracks in either policy or commitment the fall out will be huge and not limited to Japan.

The market discovers the true Wizard of Abe

Strange But Untrue and Other Facts That Don't Matter

noreply@blogger.com (Polemic) — Mon, 20 May 2013 21:17:00 +0000

Like good sports commentators with slow runs of play to fill, finance turns to statistics to fill the time. To many of us, data is data and the more reliable data you have the more chance you have of being able to to sift the odd gram of gold out of the muck. But there comes a point where the noise exceeds the signal and, as Theodore Roszak said, there is "Data data everywhere and not a thought to think"

But slow days and newsless days (today being a pretty good example) has everyone turning to lower grade soothsayer techniques in the absence of others. Was there a power failure at the Financial Meteorological station supercomputers leading the weather forecasters to turn to slicing up small animals and spreading out their entrails instead? For TMM's inboxes are filling up with statistics which instead of being valued for their ability to forecast are being offered just for for their bizarre interestingness. That Met Man would say "Oh I don't even care if it will rain, just look at that squishy red bit, I didn't know it would be connected to that moving wormy thing". The financial equivalent of which is -

"Of the four negative weeks just two of them included losses over 1%".
"Tuesdays have been up days for the last x weeks"
"The S&P 500 trades at 12.8% or higher from its 200 DMA just 8.3% of the time".

How riveting yet absolutely devoid of predictive powers. This is the financial equivalent of the football commentator explaining how many times the letter "e" appears in the away team captains' grandmother's names over the past 40 seasons. Markets have to say something. There can be no silence. Audiences don't expect silences and the suppliers of information abhor a silence, be they media or sell side information providers. We are pattern recognising beings but there is a point where data mining crosses over into the astrological. Finance's version of "Thats Amazing"

However we are reminded of a very apt interview question for would be traders that does rely on Bayesian probability - "If I was to flip a coin 99 times and it was to come up heads each time, what would you call for the next flip and why?" Of course the 50/50 rule is the one that "Jim Smug" fresh out of Uni would answer, but we are looking for the cynical old salt who announces. "Heads because the coin is obviously bent". But in the cases above, the twist of fit and assumption to derive the next move is just far too far away to be useful.

TMM have long been wanting to write a book to counter the books you find in your friends' lavatories entitled "Strange but True", the ones to be found next to the 1986 Guinness Book of Records and the odd "White Company" catalogue that proves that men aren't the only ones to dawdle on the pan. But TMM's book would be called "Strange but Untrue" - A compendium of strange facts and figures all of which are amazingly untrue.

Originally it was to contain Strange but Untruths such as
"Most shark attacks occur in less that 1/2 an inch of water"
"17% of the air you breathe on the subway is human skin"
"If you spread the surface area of your lungs over the area of a tennis court you will die" Actually that one is true.

But we have realised today that the world of finance is so full of data from which absurd sound bites can be fashioned we thought we would add our own, so if you are in the business of peddling information to clients or just bored and want to confuse a 12yr old quant analyst please feel free to pick one of the following and present it with a serious face and "knowing" eyebrows .

"The 4th friday sees a reversal of a percentage equal to all the rises on the Wednesdays divided by those of the Tuesdays"
"The PE ratio of the leading 20 Estoxx is equal to the fibonacci retracement of their Market caps".
"Just 26.78% of the best performing days are in the week before Lent (conditional upon Easter being in April)"
"If you read the first initial of the DOW components in reverse market cap order they spell CRASH COMING"
"19.87% is the average PE of firms with PEs between 19.75% and 20% and is also the year of the great crash."
"The last time the SPX went up a bit, up a bit more, down a bit, left a bit .. FIRE. .. They missed earnings by 12%".
"Currency codes have only 3 letters against most nasdaq stocks having 4 because spot dealers attention span isn't as long."
"The introduction of the Euro was a really good idea".

All of which may be completely untrue. But the market loves a statistic or a truism and TMM often spend their day wincing at some of the old catch phrases that are wheeled out as simple justification for not knowing. We aren't just talking the nonsense that comes out in annual reports, analyst or Investment Manager reports such as -

"Your board continues to implement the new multi-polar strategy, though current headwinds offer significant challenges"
"The current unfolding barbell perfectly describes the arc of investor indecision as the underlying market shifts to the paradigm we descibed in last months bulletin"
"The Investment managers after careful consideration have adjusted the benchmark – investors will be pleased to see that the latest quarter has substantially out performed this new threshold"

We mean the ones that are considered gospel and if muttered knowingly are meant to end debate, such as -

"More people have bought than sold". - Or "Everybody's buying". - For a trade to be complete every sell has to match a buy.
"Whatever goes up will come back down" - Voyager 1 is a good case "not" in point. As are UK rail fares.
"You can’t go broke taking a profit" - Unless you spend more on your vices than the amount you take as profit.
"Prices always move for a reason" - Rarely for the reason most people believe.
"New new things always make money" - Unless they involve trains ( railroad stock dumps / Eurotunnel) or Vanadium Redox Batteries as TMM found out to their cost. .
"Charts tell the future" - Do they? Can you tell us the future from this one please?

Have you got it? Many things are not as clear as they would seem yet somethings are clearer than you think.

Disinflation.

noreply@blogger.com (Polemic) — Wed, 15 May 2013 21:12:00 +0000

Well we had better mention the Aud before we kick off. Macro great, bounce none. So we reinstated the shorts through 0.9950. But anyway, onwards..

Much has been made recently of the disinflationary trends globally together with the apparent end of the commodities super cycle which is now evident in global price indices. Please note we are using the term "disinflation" (a decrease in the rate of inflation) which should not be confused with "deflation". Now, this has been reasonably well noted by market participants, but TMM thinks that the effects are not yet well explored. Specifically, TMM thinks the decline in inflation volatility has subtle but strongly positive effects on financial asset prices and a negative effect on commodities. To that end, history may serve as a guide. The last time the US went through a period of stable inflation, whereby both headline and core (i.e. headline ex energy & food) inflation were closely coupled, was in the 1990’s:

TMM recognizes that given the backdrop today, the 90’s may seem quite different. But it’s worth noting that for this exercise, we are not comparing absolute levels. Instead, we are concerned with relative changes. In other words we are more concerned with the direction rather than the size of the move.

The Effect on Bonds is a bit tricky to measure, since Fed policy is such a big driver. But in this respect, we can use the yield curve as a very rough proxy for the yield premium on long term treasuries. And the story there seems to be one of a declining yield premium. From 1995 to 1999, the 5s30s yield curve actually flattened, even though the Fed cut rates by over 100bps. It’s quite possible that the improving budget deficit at the time may have had an effect , but the budget deficit is also improving now. All in all, this makes sense – with decreasing inflation volatility, (and by extension central bank activity) investors are likely to demand a lower premium for long dated bonds.

The Effect on Stocks is also quite positive, as they are also a long dated financial instruments. With declining inflation volatility, nominal earnings volatility can also be expected to decline, which should reduce the risk premium. There is an old 20-CPI estimate for the S&P PE ratio which has had some reasonable success over the long run. This is now suggesting that PE should be in the very high teens:

The disinflation impact on gold, however, appears to be quite bearish. The chart below shows gold in white, Fed Funds rate in Orange, CPI in Yellow, and the price of WTI crude oil in purple. Note that from the mid 90’s, the price of gold fell ~60%, even though during this period the Fed cut rates, we got a series of systemic events (LTCM, Asia crisis) AND oil prices rose. Again, the improving federal budget deficit may have also contributed back then – but that is also happening now.

In addition, there are some unique instances that are worth mentioning. Obviously disinflation gives DM central banks more room to pursue QE. But ironically, the disinflationary impact probably also makes QE less effective at generating inflation. Case in point: Headline Inflation in Japan has averaged 40bps above core inflation over the past decade. This suggests that once the inflationary impacts of the weak Yen runs its course, it will be even harder for the BoJ to achieve its 2% inflation target. The small caveat here is that the Nipponese CPI basket can actually be changed or rebased to give the appearance of higher inflation, at least temporarily. TMM expects such a change within 2 years and remember the basket being manipulated in 2006 to, believe it or not, print inflation lower (smoke and mirrors and government payments).

For Europe, current austerity targets look even more difficult to achieve, given that EMU inflation has averaged 56bps over core inflation the past decade:

So where does this leave us? Last to the party with yet another reason as to why equities will keep on going to the moon and gold through the floor? We would actually like to think we were one of the first to arrive at this current party but popped out at the end of January to get some cigarettes only to find that everyone is high by the time we return. But this is a longer term trend and as we are calling for the party to go on into the night we might as well wade in.

But how? We actually think that the chances of a melt up are still pretty high. Some of us were there in 1997-2000 and can smell exhuberance and fear. That darkest of fears, the one of missing a profit. As we have said many a time, it ain't over til 25yr olds are driving around in 3 series BMWs bragging about their portfolios. We are adding to low delta SPX calls. Gold? Well we are already short and happy to ride that into a golden sunset.

Friday Ramblings

noreply@blogger.com (Polemic) — Fri, 10 May 2013 09:33:00 +0000

Continued good jobless data has reset USD and US mood in general and there has been a proliferation of US Jobs analysis resulting in line-drawing that extends to 6% unemployment levels after further +200k NFPs. The USD/JPY break was perhaps the sound of the market cracking as this weight was added to that of Abe and EU policy moves and clues. Whilst everything US is indeed looking better than a lot of everything else, it may be getting a bit short term extended.

AUD appears to be on the receiving end of Soros / CB de-diversification / pick your bogeyman. Either way we are pleased, but note the sensitivity of Aussie inflation to imported goods prices. You can only make money on bills and AUD up to a point. We will add that the USD/JPY break has pulled many USD crosses through short term targets and though we expect AUD to underperform we are lightening our AUD/USD shorts at this level looking for a bounce to resell on.

Schauble's talk of loosening his garrotte of austerity around the throats of periphery pre-G7 (why are they holding at a public hotel rather than at "Chequers"?) may just be pre-talk camaraderie, but there is a theme. Despite weak Italian data we see the Eur/Usd down move abating as growth prospects balance the -ve rate fears and instant USD effect. It's still actually in a range.

Equities in general - Towel chucking from perma-bears, yield calcs on zero cost funding and much much more continue to fuel the boom. We have a piece prepared on background "why buy equities long-term" but its such a common call we are caught behind the curve. We are dip buyers like the rest of the planet. Meanwhile, make us a price on how long it will be before regular daytime TV features stock trading programs again.

TMM note the mad rush into "safe" assets like XLP, XLU, and the like. TMM have more to say on this at a later point but suffice to say all low volatility dividend payers are not created equal - we will revisit this soon.

Tesla has proven that there's bad investment advice, then there's the advice you get from Sarah Palin. TMM think ultimately better battery technology is a great leveller in EVs much like cheap polysilicon was for solar. TMM think the Suntech chart from 2007 may be instructive here. Some of us were long but are no longer. Tesla worth more than Fiat? Short term that price action has got "dotcom" written all over it.

On general asset price rises - QE is fuelling asset price rises but doing little for income. In fact income ratios are falling as asset prices rise. Great for holders of capital but until they withdraw it to spend, the gap of wealth between poor and rich continues. QE has to reach income before it works. TMM have been wondering if just bypassing all the links and handing £5000 to every head of population would be quicker and benefit the poor over the rich.

Commodities:- TMM note that while equities are now trading on concerns of QE, zero financing etc much as commodities did in 2009, commodities are now trading on FUNDAMENTALS. Fancy that. Note crosses like Palladium / Silver - the former will stop being produced at these prices as every South African mine goes under, the latter falling due to structurally declining demand trends ex hoarding which also happens to be going backwards. Its a pity all those commodity funds are getting redeemed just at the time having any expertise has value but that's life with hedge fund allocators we suppose.

TMM are also wondering if speculation can hold inflation lower than it where it naturally should be. As the speculative drive into commodities, especially oil, seven years ago drove up actual inflation, perhaps the expectation of no/low inflation drives speculative positions into short commodity trades that feed through into real low inflation. If so, they are winding up a coil for a sharper snap back in inflation when the time comes.

Finally for all those long Nikkei / yen hedged - Been a good ride hasn't it? But crowing demands beer buying for the house

Central Bank Alchemy and more Negativity

noreply@blogger.com (Polemic) — Thu, 02 May 2013 22:56:00 +0000

It's been a week or so since our last post and May is lining up to be another case of capitulation. Capitulation on the inflation trade, capitulation on the growth trade and capitulation of the "world is normal" trade. And throughout this equities march onwards. Buy buy buy buy.

There's plenty being said at the moment about what other people think, to the point that TMM are getting quotosensitive (much like "photosensitive", but this brings us out in hives when we hear other people's opinions repeated as religious portents). If we want opinions from people who have just as little clue as everyone else then we will talk to ourselves thank you. We don't care what Bill or Warren or Paul or Roggoff or Rienhart or any pundit thinks. We should stop reading what other people think and start thinking for ourselves.

Is this part of the Twitter problem? Recycling of thoughts diminishes the ratio of originality to quote to such a point it's not worth thinking for yourself? Or is it something to do with education? One of TMM's offspring was writing an essay last week and had an original thought to add but felt they couldn't because they had to reference all thoughts and ideas. "Reference yourself" we suggested. But no, a rare original thought bit the dust because someone else HADN'T said it first.

The Roggoff Rienhart witch hunt appears to us to be more of a blame game in a world of desperation rather than anything important. Are people really not thinking things through enough for themselves, that a spreadsheet error can cause global policy error (this isn't rocket science). Oh actually scrub that, we've just remembered how the Buba work.

But, wow, imagine this ...

WEIDMANN: " Hey Wolfie, you won't guess what, I've just found a +/- error in cell A3, you know all zat shit about ze periphery and all zat austerity stuff, guess what? We should be giving them MORE not less HAHAHAHA",
SCHAUBLE:- "No shit! That's hilarious! Do we tell Cyprus?"
WEIDMANN:- "Nah, fuck 'em. Let's tell zem we want a special haircut on ze depos, you know a "cyprus special", its like a normal haircut but twice the price and rubbish "
BOTH:- "MWUAHAHAHAHA"

Policy is not swung on spreadsheet corrections and if it is then it's time to change the policy makers.

TMM have been doing lots of pondering recently, mulling their own thoughts around and it's pretty hard not to just come out with a rehash of many themes we have posted here already over the past couple of years. So excuse the a number of back links. But one over-riding trend is the growing push against austerity. Populations get impatient and the data is still looking dire. Money multipliers are not working and the machine is grinding to a halt. Well that's the concern. Desperation is kicking in and any money that is being printed doesn't appear to be ending up where the printers would like it to. So today was another of those days when the world looks to the central bank wizards for results, but at this rate the great book of Central Bank Policy will one day be filed in libraries under "alchemy".

Dr Aghi, Abe and Bendrick hard at work -

So what did Dr Aghi come up with? On the face of it not a lot. A predicted 25bp cut and no special methods other than the special method of saying thalt he is prepared to use special methods. One of which is the much talked about possibility of negative rates -

"On the deposit facility rate, we said it in the past: we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. We will look at this with an open mind and we stand ready to act if needed"

Looking at negative deposit rates “with an open mind”? This has prompted TMM to go back to thinking about the if/how/why/whether they will be implemented. In this respect, a speech by Benoît Cœuré in February 2012 seems especially applicable and we wonder if Dr Aghi is paying direct reference to it - here is the link, along with some select sentences:

• From a technical point of view, there is in fact nothing that prevents central banks from paying negative rates for the security they offer to depositors, at least temporarily
• Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes.
• And there is a degree of hysteresis: a temporary situation of zero or negative interest rates can have long-lasting implications for banks and their trading incentives… The Japanese experience is of course relevant here. [9] Within three months of the introduction of the zero interest rate policy, the volume of transactions declined by around one-half and low turnover persisted until end-2006 when the zero interest rate policy was discontinued.
• Important market intermediaries, such as money market funds, could be driven out of business, as their business model loses profitability, for both domestic and foreign investors with excess liquidity may shift their investments to alternative, more profitable market segments.
• zero or negative interest rates may produce adverse effects on the profitability of commercial banks and financial intermediaries more broadly. In a financial crisis this can result in a credit contraction. All in all, the impact of zero rates on the profitability of banks remains uncertain and highly dependent, among other determinants, on parallel regulatory response.
• Overall, a switch to zero or negative interest rates bears some risks – mainly of a microeconomic nature – which would have to be weighed against potential benefits in terms of additional macroeconomic stimuli. It also has to be noted that such steps would be warranted only in the face of clear downward risks to price stability, which today are not present in the euro area. In particular, the discussion about deflation risks remains largely speculative.

For comparison, here are the ECB staff forecasts then and now:

Now, TMM recognizes that Euro area HICP inflation has been especially subdued recently. But even with these considerations, the ECB would have to sharply change the definition of ‘downward risks to price stability’ for negative rates to be justified given current forecasts, assuming it is still using the above prerequisites. Of course, it is possible that the ECB council has internally relaxed its criteria for negative rates – but that does not yet appear evident based on ECB member speeches.

But all this has led us back to looking at the effects of negative interest rates and some of the possible consequences, however we have discussed most of those HERE (Was that nearly a year ago already? Don't crises drag on?). But we were particularly reminded of this post by Cœuré's line "Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes" which prompted us to think of ways of making holding cash even less attractive.

Other than those listed in the previous post we suddenly had a Eureka moment that unifies an old anthropological conundrum of the small Micronesian Island of Yap with todays ECB policy dilemma. If you really want to make cash unattractive as a handy medium of exchange then you can't do much better than the Rai Stones of Yap . It is therefore obvious that the origin of these stones was a case of runaway deflation caused by a tribesman incentivised by large bonuses, leveraging his balance sheet by using complex derivatives to the point of creating a credit bubble resulting in a deflationary economic collapse and the implementation of negative rates on cash deposits by the Yapese central bank followed by the logical introduction of the most useless form of cash on the planet.

So TMM would like to introduce you to the new 1 Euro coin.

And how it will be used:-

The ECB committee popping out for a box of matches.

Is the Aussie Safe to Short?

noreply@blogger.com (Nemo Incognito) — Thu, 18 Apr 2013 09:32:00 +0000

TMM thought it would be time to review their old friend, the Aussie. A couple of interesting research pieces have come out from the sellside at the same time as one member of TMM has been travelling downunder so we thought we would try to find some sense between the 10,000 ft world of the big picture and capital flows and slightly more granular information on capital expenditures from corporates.

Lets start with the big picture of Aussie capital flows and what is holding up the currency. Shorting AUD has been about as much fun as being in the octogon with George St Pierre - just when you think you've got the terms of trade flow right you get slugged with flight to quality flows and just when you think they are receding with normalization of the volatility regime you find mining majors rushing into the market to build mines and gas plants as fast as they can. Its about as much fun as being hit in the face, then kicked, then thrown on the ground and strangled until you ~~tap~~ stop out. Ie not fun at all. So, where are we now with respect to these key drivers of flows and where are we going?

First, it appears that portfolio flows have slowed down somewhat. There are some tentative signs of a slowing of reserve accumulation ex Japan and Australia has not seen material net inflows for a couple of quarters.

TMM are big believers in normalization of current account balances as being a sign of the world getting better and this does appear to be happening. So, if reserve assets are generally going down and the eurogroup does not do anything insane for a while, perhaps having had their false idol of Reinhardt and Rogoff smashed by a bit of basic spreadsheet math then there should be less net flows and much less flows to Australia. TMM won't bet the farm on this one but having been blindsided by these flows despite having got the commodities picture largely correct we have stopped whimpering and gotten out of the fetal position on this one.

Second, what about European bank deleveraging? This provided a substantial tailwind to shorts in 2011 but has also tapered off as of late. BIS data seems to indicate that Eurobank exposures to Australia are now low enough that it is unlikely to be a key driver and anecdotal evidence from our trip down here indicates that most eurobanks that are leaving the market are down to their last couple of hundred million dollars of loans. The loan auction-palooza of 2011 appears to be a long way away now.

Third - what about all that mining investment? This is a bit more contentious and frankly much more important of a driver of flows in the last year and going forward. Investment continues to be torrid and while the coal sector is desperately looking to cut capacity after an apparent step function change in Chinese thermal power growth and iron ore projects get cancelled the gas sector rolls on. Or does it? Here is ANZ's pipeline of future projects as of Jan 2013:

The problem here is that Browse has been cancelled and Arrow is being doubted by the market. While this does not do anything to change the peak in investment (2013) the rolloff of projects appears to be very steep indeed after 2014 with not much in the pipeline. Now, TMM know there is more to life than gas, coal and iron so we thought we'd look at the contractors sector of the AS51 for clues as to what their development pipeline looked like:

Ohh er. Not pretty. Worst hit are coal and iron ore oriented names but the rest are not exactly in great health - maybe that has something to do with public sector sources of revenue being closely tied to resources like Queensland which tends to curtail public sector projects like rail and roads:

One partner of a insolvency advisory in Australia described what was happening in the Hunter Valley and Bowen Basin, both major coal mining areas as "a nuclear winter setting in". Not a lot of room for interpretation there. Word is that if you want to finance "yellow goods" - ie, things like bulldozers and massive trucks then you generally will not get much love from Australian banks who have seen this show before.

TMM have been wrong before on AUD but we are finding it hard to see what keeps it higher from here given the collapse in investment we are likely to see over the coming years. Even if the

investment flows do not do it then rate cuts cannot be that far behind.

Putting that lot together TMM feel that Aus$ is vulnerable to an old fashioned sharp move lower in a "thatshouldnthavehappened" style that is pure "Gold".

Observations from Camp TMM

noreply@blogger.com (Polemic) — Tue, 16 Apr 2013 09:38:00 +0000

- Nikkei did not fall despite Usd/Jpy pull back and the US falls.

- Asian Markets did not really fall despite US and European actions.

- So this is not a global relinked "risk off" move and still sits within "positional" explanations.

- Gold has bounced though the bounce is still ex-feline.

- Some of TMM have been doing some company visits downunder and keep hearing that "winter is coming" from mining guys. We aren't sure if this something to do with "Game of Thrones" or just a southern hemisphere reverse seasons thing or whether this is just a reflection of mining contractors' order books.

- Aud is looking as sick as a dawwg (our cross hairs are back on it).

- Not much real news, with Price is News starting to dominate.

- Boston - really terrible and hopefully an isolated event.

- China is slowing but not crashing.

- Jim Reid has devoted 50 odd pages to showing that historical returns to high yield at these spreads are really bad. Thanks Jim, we know. Now what is the catalyst?

- Soft ZEW result is already in the price.

- John Sweeney's BBC Panorama program about North Korea didn't tell us anything new or actionable and in TMM's eyes was a journalistic self-indulgence that, having used LSE students as cover, puts future acedemic research in dangerous lands at risk. TMM wonder if, like they do with dodgy banks, it's time to split the BBC into a "Good BBC " and a "Bad BBC".

- A recent dreadful dining experience has spawned a new entry for the TMM glossary:-

Aqua Nueva - A distillation of pure arrogance and appalling service containing no spirit whatsoever served in a glitzy shallow vessel to the detriment of the recipient. As in "The Eurogroup served Aqua Nueva to Cyprus". Like the London restaurant with the same name and dreadful attributes, to be avoided at all costs.

- John Sweeney = Aqua Nueva

Price = Theory + Reality

noreply@blogger.com (Polemic) — Mon, 15 Apr 2013 14:45:00 +0000

TMM are finally emerging from their Gold bear bunker, having decided two years ago that there was never ever any point in discussing the value of gold as it verged on religious resulting in a torrent of abuse from the spamchuckers that made it just not worth the bother. But this morning we have got to the point where it can't be ignored any longer as some are blaming it for moves in other assets.

Gold is back to 2011 levels and Silver has just broken through a support at 26.00 that, if you like horizontal support lines, has been the road over a sinkhole.

Anyone who has ever studied supply and demand Econ 1.0.1 will now be scratching their heads and looking for a conspiracy theory to explain away something that "shouldn't have happened" (just go and have a look at the Hero Zedger comments in any gold piece they have posted recently). At this rate the tin-foil beanie wearers will be able to afford silver ones But isn't it the biggest no brainer that if you print money then the value an asset of limited supply against that money has to rally?

Let's pose a question to our Econ 1.0.1 class in the style of "A Question of Sport's" "what happens next" round.

Presenter - "Japan, running out of options and seeing the success of US actions, opens the taps and announces it will print an incredible amount of money, vowing never to stop until it encounters inflation. So what happens next?"

Ex sports star - "Well Jpy takes in on the chin and hits the deck and gold goes to the moon and his shorts fall off"

Presenter - "Anyone else?"

Other ex Sports star - "Gold catches fire and runs up the pitch screaming whilst the yen crashes into the posts"

Presenter "No. Run the film and lets see what happens to gold in yen terms.."

So what's all that about then? TMM sees it as a lovely example of how theory disconnects from price via reality, in other words - TMM's price equation of Price = Theory + Reality (P = T + R) where reality is everything that isn't in the theory. Theory is all well and good as long as you have enough people believing in the theory, or more rightly willing to back the theory with their own money. Its all very "Bitcoin". It will go up whilst everyone believes it will go up, whether that is based in economic theory, technical analysis, or just straight forward herd mentality. But TMM like to think that the world is more complicated that Econ 1.0.1 and just as Econ 192.168.0.1 is doing for Bitcoin so Econ 79.197.1 is doing for gold. No matter how much of a fixed asset it may be it is reliant on a) everyone agreeing that it is a store of value and b) being better to hold than any other store of value, whether that is stocks, bonds, fiat cash or lumps or gallons of any other commodity.

But isn't gold an alternative currency? One of the requirements for a useable currency or money is that its value is predictable and has a low volatility. Pricing eggs in a currency that is wanging around in 10s of percents per day, whilst exciting for traders, is not conducive to reducing risk for shopkeepers or customers. The argument that a complete transition to the newer money would eliminate the volatility relies on 2 assumptions. First that things would settle down after transmission as currency supply steadies and second that a transition would be possible whilst high volatility exists. The European transition to the Euro was accompanied with a volatility that tailed to zero in the run up. Jumping straight to a Bitcoin or gold function with the current levels of volatility would be impossible. So obtusely, the very reason that Bitcoin (or Gold during its run up and collapse) could not replace existing currency is because of the very volatility that is responsible for its heightened visibility.

Isn't it a hedge against inflation? Well let's look at the chart below which is the US price of gold inflation adjusted.

We would imagine that a perfect hedge against inflation would see a flat line with the odd wobble as expectations get ahead of price. The chart above shows that they are hardly small wobbles and at current levels we would need to see 100% inflation or the price drop from these levels by a half to get back to the sort of eyeballed averages of $350 inflation adjusted. If the above chart implies expectations for inflation are already to be 100% over current price then there is an awful lot of room for inflation expectations to take off before the price has to budge.
+
Which leads us on to think about inflation expectations again and to wonder if we are seeing something that should worry the BoJ. Just when they have unveiled their nuclear bazooka, designed to spark the living fear of inflation into its populace, are we instead seeing a general market capitulation in the inflation trade? Commodities are off everywhere. Oil is down another 2.5% on the day and linkers are doing the same. Even the ultimate measure of usd/jpy is off 2.5% from its highs. Or is it the growth trade being unwound? The growth and inflation trades are to TMM (and obviously the BoJ) much as the interaction of magnetism and electricity are to each other. They are probably bound by a single Maxwellian equation combining the two, resulting in some Fleming hand gestures. In this case, the resultant force on gold is represented by an extended middle digit.

Where is this leading us? Corrective moves or a new phase? We have to say that our short term trading antennae are concerned that Asian time saw the biggest wash down in gold prices and Asian time zone rarely sets new direction and often sees blow off peaks or troughs. which causes us to pause before jumping in, but with Econ 1.0.1 having been taught a lesson in P=T+R we think it less likely for such trades to be as reloaded. In a way if this is either the US growth trade being lightened or the global inflation trade being lifted it is still very interesting as it is indicative of some sizable perception changes.

Our debate extends to where this leaves equities. On one hand we should have sectoral suffering as commodity producers fall but on the other hand the feedback loop of lower input prices is great for everyone elses' margins, which once again leads us back to preferring equities to much else. Having been left behind by the equity train since the start of Feb we are still hoping for a drop to buy on, hopefully that will be on a continued growth/inflation trade unwind. We do believe that ultimately policy WILL stimulate to the tipping point that will provide inflation. How do we know? Well they've told us haven't they? But that could be a long time off.

In the meantime there are a lot of 5 minute macro managers trying to reconcile money management issues with long term theory.

Post BoJ New World Quiz

noreply@blogger.com (Polemic) — Thu, 11 Apr 2013 11:47:00 +0000

Sorry to stick to a Japanese theme but the 2013 Japanese money tsunami is engulfing everything financial to the extent that many new questions are now being asked. Here are some of them.

If you are a Japanese central banker do you -

a) Retire to the mountains having done your job.
b) Read the story of "Pandora's Box" that someone has just handed you.
c) Wonder if leaving out the "capital controls" part of the Japanese 1932 Great Depression rescue plan policy you are trying to reuse, might be causing all your fresh money to fund other people's recoveries rather than your own.
d) Resume normal policy - Do nothing and say nothing.

If you are the FED do you -

a) Give praise that BoJ policy provides you with an exit route to QE via Japanese UST purchases.
b) Suggest the BoJ also looks at buying US Munis.
c) Wonder how long it will be before someone realises that Abe is a CIA asset orchestrating (a) and hopefully (b)
d) Write your CV and try and get out on a high to the private sector before you have to fire-hose real inflation and get engulfed in the flames.

If you are US Congress do you -

a) Vigorously support Japanese actions by signing new trade and defence agreements (but ask not to be paid in Jpy).
b) Kick up a rumpus over Japanese currency manipulation and introduce trade sanctions.
c) Blame the other side and praise yourself ( business as usual).
d) Ask where Japan is and ask why they ain't speaking English.

If you are a French politician do you -

a) Point to the rally in OATs and say it reflects confidence in French policy.
b) Point to the rally in OATs and say it reflects confidence in French policy and so raise taxes.
c) Blame Gerard Depardieu for eur/usd's rally which is solely responsible for the demise of your oh so competitive export industries.
d) Go back to lunch as it's the Germans running Europe not you so why bother.

If you are a Swiss central banker do you -

a) Welcome continued large inflows of private money which you can use to fund local industry.
b) Worry like hell about why anyone in their right mind still wants to buy the Chf.
c) Get ready to cut rates and protect the eur/chf floor
d) Wonder if you intervened by selling chf/jpy there would be some sort of financial logic loop explosion.
e) Make all foreign deposits in Swiss institutions junior to locals.

If you are a Eurogroup member do you -

a) Send a large hamper of Italian luxury goods to Abe with a bouquet and thank-you note.
b) Slap yourself on the back and issue press statements linking periphery rallies to confidence in your policies.
c) Say the rally is a template to recovery, but Japan is not a template, neither is Cyprus (but bank reforms are) HOWEVER - you may use any of these as templates as mercilessly as hip hop artists use 70s funk bass lines.
d) Ask the Troika for a report on Japan and eye their haircuttable deposit base with envy.
e) Ask Germany.

If you are the Bundeathstar do you -

a) Follow the master plan ignoring all other external influences.
b) There is no plan b.

If you are a European Utility with structural demand decline but with a sudden source of cheap Japanese funding do you -

a) Delever, take it like a mensch and show some regard for shareholder returns.
b) Go bananas building wind farms and other renewables on the cheap.
c) Help the Saudis build nuclear facilities. I mean, what possibly could go wrong?

If you are a Japanese REIT now valued at a 3.5% cap rate do you -

a) Build more condos and sell them to..err..... your declining population.
b) Build more condos and lobby for immigration in order to have customers.
c) Screw it, buy a bunch of assets in Brazil, Australia and anywhere else with vaguely positive carry.

If you are an Australian miner staring at what Japan has done to AUD/USD do you -

a) Cry to the RBA and make a fuss.
b) Lie on your back while your creditors have their way with you and think of England which long ago gave up inflation targeting.
c) Try not think about the topical debate about Thatcher and the history of the UK mining industry.
d). Mortgage your jet skis and V8s.

If you were a struggling Greek Region facing all the grim reality of uber-austerity do you -

a) Knuckle down and get the olive presses going again, Japan and its effects are just too far away from the daily struggle.
b) Pray for a miracle involving finding a huge deposit of Gold under your feet which will transform your lives.
c) Have all your prayers answered and find a huge deposit of Gold under your feet but then argue with your neighbours to the extent that no one ever digs it up and you lose all your friends. (for clue click here)

UK Model for Japanese Inflation.

noreply@blogger.com (Polemic) — Wed, 10 Apr 2013 11:18:00 +0000

If Japan is serious about wanting inflation then instead of flooding money into the global pool they should just turn to the UK and announce that they will soon -

Have UK energy companies running their utilities.
Have UK insurers insuring their cars.
Have UK government price tobacco.
Have any UK train company running their public transport.
Have UK's "PC World" fix their computers.
Have UK main dealers fix their cars.
Have UK local authorities run their car parks.
Have UK motorway service stations provide all fuel.
Have their children educated at English private schools.
Have all online billing done by Ryanair.
Have UK "payday loans" run their bank lending.
Have EasyJet supply all preprepared foods
Have UK Farmers' Markets supply all fresh food.
And then make everything organic.

That should scare the hell out of the population with respect to inflation expectations. It's worked wonders in the UK. Just a shame about no growth.

If they do need to go further then perhaps-

Have USA run their fighter jet programs.
Have France run fiscal policy.
Have Singapore tax their cars and price the beer.
Have Norway provide their holidays
Have Switzerland run their McDonalds.
Have Courchevel run their ski resorts.

Japanese Laughing Gas

noreply@blogger.com (Polemic) — Tue, 09 Apr 2013 11:03:00 +0000

Wandering into the Accident and Emergency department of Financial Hospital, Globesville, US data took a seat next to European Growth, who shuffled up closer to European Politics to make room. Australian mining looked on mournfully from the other side of the room nursing a broken bid. The room was full and the staff looked worried.

The US had been on QE antibiotics for years and the doctors were worried it might have caught a resistant strain of slowdown. It looked as though its Seasonal Affected Disorder was coming back too.

European Growth had looked like it was recovering from its savage mugging but, despite the countless sticking plasters its brother Politics had applied, it was bleeding again.

European Politics had been in counselling for 3 years for its multi-personality disorder, yet was still trying to kill itself at every opportunity. Its job as a party balloon twister (take a straight Maastricht treaty and with a few twists .. like this and...Voila!! It's a pig's ear!) had also left it with chronic arthritic joints.

Australia had been at its own party and was intoxicated when it slipped on its own hubris and broke its main export market.

UK, having blown its inheritance on an addiction to foreign imports and lavish spending, sat shivering in the corner. The methadone of low rates and QE was doing little to return it to health.

Germany was suffering from "Munchausen by Proxy", convinced that everyone else was ill and in need of a dose of their German cure. It was having to be restrained by the guards, but its protests were upsetting the Peripheral family huddled in the corner waiting for their repeat prescriptions.

The relatives did their best to soothe the patients but there was only so much the Far East could do.

Dr Ben was exhausted after a full night on call and his drug cabinet was seriously depleted. Dr Aghi had taken over and tried to order more pharmaceuticals but had been blocked as they weren't yet approved for European use. Things were looking dire and the markets were fearing the worst.

But then the doors burst open and in flew Dr Abe, dressed in a magnificent golden coat! "I have a plan!" he screamed maniacally. "What's your plan doc?" cried the others. "THIS .." and with that he opened all the taps to all the Nitrous Oxide cylinders in the department. The intoxicating vapours of the laughing gas swiftly filled the whole building and were soon working a wonderful magic. The Peripheral family were the first to giggle and were back on their feet. Seeing this and realising what was happing, European Politics started to relax and burst into laughter and even made friends with its alter egos. European growth was soon to follow and was on its feet cranking up the volume of "Remember Me" on the Tannoy.

Abe's laughing gas and the beat soon had everyone up and partying. The US had a big smile on its face and was dancing with the Far East relatives who themselves were so happy they were opening their wallets and throwing money around instead of saving. Australia had found the surgical spirit in the cupboard and was glugging it down telling everyone who would listen how great it was and even the UK had a grin on its face as it swigged on a bottle of secondary effects.

Only Germany sat miserably in the corner behind the gas mask it had swiftly donned to prevent it from inhaling the narcotics it so abhorred.

The staff watched in awe as Dr Abe led the party like the Pied Piper out of the hospital and into the night. But as the doors swung closed and the sound of revelry diminished into the distance, Dr Aghi shook his head and let out a resigned sigh to Dr Ben...

"They'll be back"

TMM Translate the Euro Commission Statement on Portugal

noreply@blogger.com (Polemic) — Sun, 07 Apr 2013 23:48:00 +0000

Team Macro Man translate the Statement by the European Commission on Portugal
As usual the original is in italics.

Brussels, 7th April 2013

The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment.

We are totally stunned. Are they mad? Haven't they seen what we have done to Cyprus? At least their Government realise what it means. This is like stopping the antibiotics early, the infection is going to come back even stronger and kill them - and probably us.

The Commission therefore trusts that the Portuguese Government will swiftly identify the measures necessary to adapt the 2013 budget in a way that respects the revised fiscal target as requested by the Portuguese Government and supported by the Troika in the 7th review of the programme.

The Commission therefore make's it abundantly clear. Identify what went wrong, eliminate the problem and continue taking the foul medicine in the doses prescribed by Dr. Troika.

Continued and determined implementation of the programme offers the best way to restore sustainable economic growth and to improve employment opportunities in Portugal. At the same time, it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, which would facilitate Portugal's return to the financial markets and the attainment of the programme's objectives. The Commission supports that such a decision be taken soon.

Continued and determined implementation of the programme is your only choice as the only other people willing to lend to you will have names like "Big Joe" and interest rates that make payday loans look like Japanese monetary policy. You have twenty seconds to comply. (See annex 1)

The Commission will continue to work constructively with the Portuguese authorities within the parameters agreed to alleviate the social consequences of the crisis.

The Commission will continue to work constructively with the Portuguese authorities and if things get tougher we will be sending aid. Namely 17,000 portions of Ikea Moose Lasagne we found going cheap (or rather "oink"). After that, any alleviation of social consequences will probably involve water-cannon.

The Commission reiterates that a strong consensus around the programme will contribute to its successful implementation. In this respect, it is essential that Portugal's key political institutions are united in their support.

If you all agree to this it will be easy. If you don't then, well, you remember "Robocop"? We once again suggest that you comply within twenty seconds.

Annex 1 - Eurogroup Plan for necessary adjustments to indebted European countries threatening to disrupt the success of the Eurozone as implemented with ~~Mr Kinney~~ Cyprus.

The Japanese Grand National.

noreply@blogger.com (Polemic) — Fri, 05 Apr 2013 13:21:00 +0000

The BoJ delivered, and then some. TMM has been fairly positive on the reflation story for Yen-denominated assets all along, but even TMM is pleasantly surprised. With a unanimous vote behind an ambitious act of policy, Kuroda has at the very least pushed back any scepticism that BoJ policy will be timid.

TMM feel that there are two questions here and it may be helpful to clarify that ahead of time:

A) How will the BoJ policies affect the actual economy?
B) How will the BoJ policies affect investor perceptions, and through that, asset prices?

For A) TMM think the question could be framed as the battle between expectations and declining real demand with the expectations channel being the main channel by which the BoJ hopes to succeed. Creating base money, even lots of it, hasn't worked, as we know and a 50bp decline in 10y rates is arguably not SUCH a big deal. And now it can't fall much further.

As it's the weekend of the UK "Grand National", the most gruelling of horse races noted for its number of fatalities, perhaps we should consider the policy as the course, the Japanese economy as the horse and growth as the finish. The BoJ has chosen a course to growth that goes via "Inflation" so let's have a look at the course and fences -

1) Force inflation to rise through a decrease cost of money relative to goods which compounded by (2) an FX driven rise in imported goods costs should create within the populace (3) an expectation of inflation to continue rising and therefore (4) a propensity to spend now rather than later. Combined with a (5) negative real interest rate this will push a move from (6) saving to spending and should drive local demand and (7) increase investment domestically and so lift growth.

As per our Non-prediction number 1 at the start of the year we see this policy ultimately working and the expectations of it working yielding profits for long inflation trades this year. However the true measures of success are going to be a long way down the line and probably only visible once 5 minute macro has moved on to fight other wars.

The processes laid out in our yearly non-predictions are clear, however and here we invoke that classic Japanese "however" clause. TMM know that Japan occupies a part of the financial universe that is far enough away from the normal universe not to share the same rules of economics. Before you cry out in horror perhaps we should apply a caveat. Japan does share the same rules of economics but the cultural and demographic overlay applied to those same rules means that the paths to predicted outcomes are not as straightforward and definitely not as efficient as others we know. So where as we may expect some obvious results to occur when an inordinate amount of freshly printed money is thrown at an economy, things are different in the land of ZIRP where the culture is to save, particularly offshore, and not to spend (c.f. Western culture and media programming of today's young). If normal economics are Newtonian physics, then Japanese economics is what happens at the event horizon of a black hole.

So let's have a look at the fences.

1) The cash injections are indeed huge and as a proportion of GDP, dwarf the US actions. On this basis alone decrease in the cost of money through the huge cash injection will dilute the money/goods ratio. But global connectivity spreads the flood increasing liquidity everywhere just as the US actions did. The melting of the Greenland ice sheets means sea levels in New Zealand rise a bit. Japanese banks may be queuing outside the study of the BoJ ready to have their orders to lend spelled out to them, but TMM wonder how much of it will ultimately remain domestic as the real demand for credit is in the West "Roll up, get your cheap funding here", rather than within a domestic culture that saves rather than borrows. The flow out of yen to achieve this moves the affect to FX (2). We are already seeing the liquidity tsunami with Japanese lifers hoovering European bonds at the expense of JGBs. Check France / Japan 10 year spreads today. (Note - remind Eurogroup to write thank you letter)

2) FX driven inflation tends to be a one off shock, unless you can get your currency to crawl lower but then the incremental moves are just smaller. It's all good, but do it too much and things start getting bad quickly, either due to a lack of investor confidence or trade partners setting up tariffs. FX driven inflation can be seen as the wrong type of inflation if it doesn't drive wage demands higher but locally stifles purchasing power.

3) Expectations of inflation rising will most probably first be seen through the FX function, which as we said could be transitory (unless this goes Weimar). So once the FX starter motor of inflation expectation is done a continued domestically driven inflation has to take over. As with the west this will have to be associated with wage inflation which we know can be extremely stubborn and culturally even more difficult to kick off in Japan.

4) Propensity to spend now rather than later. If, as we gather, the BoJ is hoping to increase inflation in the service sector we wonder how increases in inflation expectations will increase demand, as most services are not hoardable. A consumer who anticipates the cost of haircuts going up cannot go and get his hair cut 20 times now in order not to have any later. The same applies for most of the service industries that we can think of. Entertainment, accountants, lawyers, medical services, transport, maintenance - it's all time spaced. So what do you do if you are a consumer who thinks inflation is going to go up. You don't buy tech as that depreciates faster than jpy can. Once you have bought a car a year early, and the furniture you were putting off, maybe had a holiday, there is little else apart from putting on financial hedges. Property? Japan considers property as a depreciating asset and "An unusual feature of Japanese housing is that houses are presumed to have a limited lifespan, and are generally torn down and rebuilt after a few decades, generally twenty years for wooden buildings and thirty years for concrete buildings" and is taxed as such. However this could imply that the price of the land that they are built on rises.

5) Real rates are very important to the investor as a measure against returns, but TMM would suggest that to the man on the street the cost of a loan on something he isn't going to sell again (so won't consider for asset growth - see furniture, household stuff) is the cost of loan against how much more he thinks he will earn in the future. Wage inflation rather than CPI. So if wage inflation stays flat (as it has in the UK) then his real interest rate will not be negative. This is where the investor, who is always looking at resale value is very different to the consumer, who as a "consumer" by definition won't have anything left to sell on.

6) And where do they save? Overseas where the yields are and you are hedged against the expected FX driven inflation. BoJ policy change does not remove the incentive for Mrs Watanabe to borrow locally and buy Aussie bonds. It may even increase it.

7) Domestic investment will react to FX moves as wage costs become more competitive. We see no problems with this last fence. In fact once this occurs the finish line of growth is clearly insight. We just have to hope that all the other fences have already been cleared.

We will not know the result of this race for a few years but market punters are piling in to the bookies backing their horses .

So where is the money is going? Or our question B)

Looking ahead, TMM reckons that the BoJ is probably done for a few months, as it watches to see the results of its announcement today. The next step for the markets is likely to be dependent on the evolution of retail inflation expectations. This will all take time to properly assess, but in the meantime, there is little (at least domestically) that stands in the way of a continuation of recent trends.

With respect to the Nikkei, it's a bit like 1999 internet stocks, to the point that we could say that stock prices are showing stronger inflation expectations that anything else. But this is from the investment community, not the man on the street. TMM also have their money on Nikkei but not at these prices. We would like to see the 5 minute macro crowd get bored, get washed out and then join for wave two. We are acutely aware that were it not for the BoJ action equity markets would be on an even clearer downward move.

FX - We are also of the opinion that jpy has to depreciate. Either through first round liquidity transfers (as seen above) or second round inflation rallies (if they get them) moving faster than growth pushing real yields even lower.

JGBs - "The Battle of Kyle Bass". The huge JGB purchase program from the BoJ will see leakage as domestic JGB holders diversify for yield and currency fears. But this probably leaves a curve trade in play, short the short end for rate differentials (European spreads) against long the longer end for continued government QE purchases and as it becomes more apparent that this is a long race and that policy will not have the swift response that some are trading on.

In summary, the BoJ may have muddled causality and correlation and mistakenly picked inflation as the waypoint on its GPS route to growth. Its problems are demographic and a shorter route to growth, rather than the monetary response, may be the UK "Gordon Brown" response. Encourage immigration to rebalance both the demographic imbalances and maybe even some cultural ones.

However the monetary race has begun and it is a tough course.

One over Zero and Decoupling

noreply@blogger.com (Polemic) — Wed, 03 Apr 2013 16:45:00 +0000

Europe woes have not gone away and though it feels as though the market's ADHD has already confined Cyprus to the toy box, TMM still see it as a jack-in-the-box. Lid down for the moment but there is a nasty clown about to bounce out again. S"EU"prise!!!

Yesterday's Euro PMIs weren't a great shock but are confirmation that Europe is suffering from both of its perennial problems at once, politics and economics. In the past when we have seen economic crises the political will has held firm. Perceived breaks in the unity of policy have only tended to shine through when the economics were supportive enough to allow luxurious room for "debate". But now we appear to have greater policy split than ever occurring as the economic outlook is getting worse. TMM still vote with their P/L on Europe and call the zone lower.

Meanwhile the US markets are doing OK leading to calls that US has DECOUPLED from Europe, but the US is playing a two speed game. We note that US earnings are diverging depending upon their US vs ex US exposures. CAT and Fedex in the naughty corner, homebuilders, telcos and other domestic names are leading the charge. However the general tone is that US recovery, spurred on by its new found cheap energy and free money, is the story of the decade and to be long anything US vs the rest of the world, especially Europe, is the best trade in town. So local has DECOUPLED from international.

Cheap money is changing many equations as one divided by zero gives an answer that is hard to use. Though we have long understood that if you fund at zero then any dividend paying equity can be attractive, the price can be anything you like for div/price to still be greater than zero. We have heard this quoted today re P/E "should be at 30". but why stop there? It could be anywhere, pick a number.

This has seen an argument flourish that equities can go up based on them having a yield and be damned with the price risk. Which is interesting, because it is another example of DECOUPLING. This time from the bond markets where the reverse logic is being applied. You can't possibly buy bonds because despite their yield, the price is "obviously" going to dump.

This leads on to another current belief, that Emerging Market Debt is a great buy as the only risk is if US treasury yields rise and you believe in the link. But EMD investors are being told that the asset class has DECOUPLED from Treasuries and are a buy on their own merits of better debt dynamics, growth and inflation.

We hear the cry of decoupling everywhere. The usually steady path of AUS$ tracking the Aud mining index has DECOUPLED, Cyprus is assumed to have effectively DECOUPLED from Europe (Scotland could soon be DECOUPLING from the UK) and we could say that Bitcoin has DECOUPLED from the USD. US data is even DECOUPLING with itself with this week seeing a sudden slew of softer numbers, but that's ok, it's only decoupled. It's getting to the point where decoupling arguments are being used to sell any old rubbish.

Whilst we understand the effect zero has on some investment equations and whilst we also understand that the Japanese may be about do an "Exxon Valdez" with global liquidity, TMM have a simple decoupling rule-

"Decoupling works really well right up until the point it doesn't, which is just after the point everyone says it does".

And that would appear to be right now.

Eurogroup English Dictionary (EED)

noreply@blogger.com (Polemic) — Wed, 27 Mar 2013 15:21:00 +0000

Trying to decode what the Eurogroup is saying into English is getting harder as policy becomes less distinct. However we have uncovered a small segment of the equivilent of the Rosetta stone. Plain English on the left and Eurogroup English on the right. We hope this helps.

Irish (adj) - Not Greek

Portuguese (adj) - Not Irish

Spanish (adj) - Not Portuguese

Italian (adj) - Not Cypriot

Cypriot (adj) - Unique

Ubiquitous (adj) - Unique

Systemic (adj) - Unique

Endemic (adj) - Unique

Theft (n) - 1) Tax 2) contribution 3) Fair share.

Deposit (n) - Bank share holding.

Depositor (n) - Money Launderer

Uninsured Deposit Loss (n) - Insured Deposit Protection

Capital Control (n) - Cautionary measures.

Economic Collapse (n) - Difficult times.

Discord (n) - Unity

Compromise (n) - Strong Agreement

Retard (n) - Dutch Finance Minister

Own Goal (n) - Mr Dijesselbloem's statement

Vague Idea (n) - A Commitment.

Hope (n) - Commitment to the commitment

Inappropriate (adj) - Template

Unsuitable (adj) - Template

Master Plan (n) - Template

Template (n) - Not a template

Dead Cat Bounce (n) - Encouraging signs

Dysfunctional Family (n) - Europe

German Foreign Policy (n) - European rescue program.

Economic Repression (n) - Prudent policy.

Vengeance (n) - Necessary adjustments.

Free Market (n) - Moral hazard

Haphazard Moral Hazard (n) - Flexible policy.

U-turn (v) - Clarification of earlier statements.

Implicit Guarantee (n) - Will do what is necessary

Panic (v) - Urgently striving to do what is necessary

Failed to do what was necessary (n) - Rapidly changing environment.

Pommel Horse (n) - Cyprus Parliament

Whipping Boys (n) - Cypriot Government

Outrageous Assumption (n) - Realistic target

Last Hope (n) - Mr Draghi

Fourth Reich (n) - The Eurogroup

The Eurogroup Statement on Cyprus Translated.

noreply@blogger.com (Polemic) — Mon, 25 Mar 2013 13:27:00 +0000

Team Macro Man offer their translation of the Eurogroup Statement on Cyprus. The original is in italics.

The Eurogroup has reached an agreement with the Cypriot authorities on the key elements necessary for a future macroeconomic adjustment programme. This agreement is supported by all euro area Member States as well as the three institutions. The Eurogroup fully supports the Cypriot people in these difficult circumstances.

We the ~~4th Reich~~ Eurogroup have finally pulled a moth eaten 3 legged rabbit out of the hat. The Eurogroup agrees with itself even if Cyprus is not at all happy with it. We fully support the Cypriot people through the difficult circumstances we have foisted on them (but not that much because it was their fault).

The programme will address the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years.

We will restore the financial sector from being a multibillion Euro earner for Cyprus into a neutered annex of the Bundeathstar (sorry Bundesbank) over the coming years (coming years = 0 to infinity).

The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex. These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.

We welcome our own plans. Please note or even praise us for standing by the deposit guarantee of E100k. As it is part of EU wide law, there is no way would we have ever suggested otherwise.

The programme will contain a decisive approach to addressing financial sector imbalances. There will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation.

We will downsize any EU economic sectors we don't like to EU averages (excepting the German Industrial sector or anything else German). As, by definition, half the sample must be over the average, if we insist on all those over the average downsizing to the average we should be able drive the average to our ultimate target of zero.

The Eurogroup welcomes the Terms of Reference for an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions, involving Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is imminent. In the event of problems in the implementation of the framework, problems will be corrected as part of the programme conditionality.

We will plug the competitive advantage that Cyprus had in the banking sector by introducing online Anti Money Laudering training for all bank staff . Problems will be corrected by insisting on an 80% pass mark over three attempts.

The Eurogroup further welcomes the Cypriot authorities' commitment to take further measures. These measures include the increase of the withholding tax on capital income and of the statutory corporate income tax rate. The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.

We are glad that Cyprus is at last doing what we tell them and look forward to them doing what Russia tells them too. As long as it involves Russia bunging in some money too.

The Eurogroup urges the immediate implementation of the agreement between Cyprus and Greece on the Greek branches of the Cypriot banks, which protects the stability of both the Greek and Cypriot banking systems.

Can you please make sure this doesn't screw up Greece again? If it does it will be Cyprus's fault. Or Greece's. But not ours.

The Eurogroup requests the Cypriot authorities and the Commission, in liaison with the ECB, and the IMF to finalise the MoU at staff level in early April.

And can Cyprus actually sign the agreement this time, preferably by April, rather than wriggling out of it at a later date as they usually do?

The Eurogroup notes the intention of the Cypriot authorities to compensate potential individual victims of fraudulent practices, in line with established legal and judicial procedures, outside the programme.

If you are mugged at the ATM trying to get your E100 out call the police, not us.

The Eurogroup takes note of the authorities' decision to introduce administrative measures, appropriate in view of the present unique and exceptional situation of Cyprus' financial sector and to allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures will be temporary, proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.

Once again this is a unique situation. Like Greece, Ireland, Portugal, Italy and Spain were all unique. Financial problems in the EU are like fingerprints - They are all unique but everyone has at least one but more likely ten. Administrative measures are temporary and in no way should be considered "temporary" as in the administration of Vichy France.

Against this background, the Eurogroup reconfirms, as stated already on 16 March, that – in principle - financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole by providing financial assistance for an amount of up to EUR 10bn. The Eurogroup would welcome a contribution by the IMF to the financing of the programme. Together with the decisions taken by Cyprus, this results in a fully financed programme which will allow Cyprus’ public debt to remain on a sustainable path.

We would rather not have had to donate anything but have been forced to hand over E10bil. Having done all the leg work its only fair that the IMF bung in their lump too. And Russia but that's a long shot so we won't mention it again.

The Eurogroup expects that the ESM Board of Governors will be in a position to formally approve the proposal for a financial assistance facility agreement by the third week of April 2013 subject to the completion of national procedures.

We want this tied down asap before someone changes their mind.

Annex

Following the presentation by the Cyprus authorities of their policy plans, which were broadly welcomed by the Eurogroup, the following was agreed:

1. Laiki will be resolved immediately - with full contribution of equity shareholders, bond holders and uninsured depositors - based on a decision by the Central Bank of Cyprus, using the newly adopted Bank Resolution Framework.

Laiki to the Abattoir

2. Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.

The three tons of entrails will be left to rot in the corner and the one gram of edible meat will be put in the freezer.

3. The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 bn Euros of ELA with it. Only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.

A small part of the good meat will be seasoned with E9bil and served at the table of BoC, the rest will be left in the freezer.

4. The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.

The ECB will provide liquidity under the usual conditions (like those applied by most payday loan companies) and of course default will mean the bailiffs popping round again.

5. BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.

We will make the BoC look stronger by switching real money for monopoly money.

6. The conversion will be such that a capital ratio of 9 % is secured by the end of the programme.

We will back engineer everything to fit our own rules.

7. All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.

All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation unless we change our minds.

8. The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of Cyprus.

Because there won't be much left over after we have paid all our admin and implementation teams we will sending over to run this scheme.

The Eurogroup is convinced that this solution is the best way forward for ensuring the overall viability and stability of the Cyprus financial system and its capability to finance the Cyprus economy.

We think this is a really good idea of ours and is in fact so good we should consider using it as a template for all banks in the EU. But no-one is to mention that. Mr Dijsselbloem included. Oh shit he hasn't has he?

"Draghi Where's your Euros"

noreply@blogger.com (Polemic) — Sat, 23 Mar 2013 20:23:00 +0000

Whilst we wait for the outcome of the current round of Cypriot negotiations, let's have a jolly song, or shanty, to cheer things up. With no apologies whatsoever to Andy Stewart, TMM give you their version of the Scottish classic "Donald Where's your Troosers"

"Draghi Where's Your Euros"

I'm back for a while from the Cyprus Isle
Where if you want your cash you'll need some guile
And all the locals shout with bile,
"Draghi, Where's your Euros?"

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

I sat in on a conference call
There was slippery talk between them all
And I was afeared that Europe would fall
'Cause they wouldn't give them Euros

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

I went for a loan to a German town
But all I got was a Schaeuble frown
And a scream from the Lady who won't turn around,
"Draghi, there not your Euros!"

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

The Germans have bound this Superman,
And the Troika want another billion
I've done everything that I possibly can
So don't ask me for Euros.

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

Let Cyprus leave or let them stay
It doesn't matter either way
We can't arrange a piss-up in a breweray
We've buggered up the Euro!

TMM thoughts on Cyprotoxins

noreply@blogger.com (cpmppi) — Fri, 22 Mar 2013 10:27:00 +0000

- The EU group is suffering from the weak leadership of the Dutch Finance Minister. The pasting he received in the EU Parliament yesterday was fully justified. He even apologised for not getting it right & said it was for us to decide if they were incompetent! TMM answer with a firm "YES!".

- This lack of leadership within EU policymaking has led to an impasse: The recent Eurogroup statements barely disguise the complete lack of agreement as "German Economics" espoused by an election driven Schaeuble, with its determination to force internal devaluations on the periphery, going unopposed.

- German Pressure is compromising ECB freedoms to do its job. The ECB has announced that it will not provide ELA to insolvent banks and will turn off the tap on Monday without a bailout. First, the ECB/ELA *can* lend to insolvent banks and has done so in the past (Anglo Irish). Second, and more importantly, the ECB is shirking its core responsibility of lender of last resort.

- Is Draghi happy with having his mandate hamstrung? TMM severely doubt it and wonder if his silence hides deeper ire that is too dangerous to publicise.

- Precedent-setting, no matter what they claim - calls into question whether the OMT can be employed in large enough scale to prevent EUR exit risk premia arising in peripheral market.

- Imposing depositor haircuts across the board (again, let's not kid ourselves: Barclays Nicosia is hardly a bankrupt bank) has de facto devalued the Euro in Nicosia. It is now worth just 0.92 Berlin Euros. This, in TMM's view, is a catastrophic policy error for Europe.

- Cyprus solution has broken THE MOST IMPORTANT FUNDAMENTAL PILLAR that supports EMU: A Euro in Berlin is both worth the *SAME* as a Euro in Nicosia, and entirely fungible. This reminds us of the similar breakdown the Federal Reserve System in the 1930s where Bills of the NY Fed were discounted elsewhere.

- Similarly, the ECB's attempt to force Cyprus to adopt capital controls is a hugely misguided endeavour, for it *too* violates this fundamental premise

- The Target 2 system was designed to prevent Balance of Payments crises between member states, not for the purpose of economic war. ECB threats to cut the Cypriot Central Bank off from its window (don't buy the ECB/German rhetoric: it's the Cypriot Central Bank that is being cut off here, not the domestic banks, given it intermediates the Target 2 balance & ELA facility to the domestic banks), & similarly the possibility of Cyprus defaulting on its Target 2 balances have turned a payments system designed to prevent crisis into the economic equivalent of a Nuclear strike. Political interference (and TMM would include the German contingent of the ECB here) should never have been allowed to interfere with this system.

- By just announcing that deposits could be haircut, the Troika have unleashed very powerful forces that will inevitably result in the deposit base of Cyprus' banks evaporating via capital flight. This, by definition, will cause a collapse in the money supply & a deep recession.

- TMM's men on the ground in Cyprus report that today, the economy has, unsurprisingly, primarily become a "cash only" economy.

- Imposing limits on cash withdrawals, online payments etc simply results in *a collapse of the velocity of money*. The economic effect is likely to be the same as if the money supply collapsed via deposit flight. MV = PQ = GDP. Cyprus's economy is being hit by an unforced policy error of the type usually seen in chaotic EM crises.

- The policy of limiting cash withdrawals was tried in December 2001 in Argentina - known as the Corralito. It failed spectacularly - within a couple of weeks. Riots eventually forced the President to flee as economic transactions became virtually impossible. Default & devaluation quickly followed.

- Cyprus is thus in the early stages of experiencing what it would do were it to leave the Euro: (i) a household liquidity crisis, (ii) a paralysed financial system, (iii) a collapse in monetary velocity, (iv) a large loss of national wealth, (v) capital controls, (vi) shortages of imported basic goods [trade credit for Cyprus now non-existent], and (vii) an exceptionally deep recession.

- The "Alternative" that the Cypriot government (with the encouragement of the ECB) is to impose Capital Controls & deposit withdrawal limits. Under Article 63 of the Treaty, these are illegal. There is, of course, a clause that allows governments to do this with a "macro prudential" remit. However, TMM totally call "horse sh1t" on the idea that such measures are "prudential", and given that they have been made up in a very short amount of time before properly thinking them through, imagine that a Court may well agree that an injunction be imposed until policy has been properly considered, instead of rushing into potentially damaging actions.

- TMM are opinion that imposing capital controls drastically increases the probability of Cyprus exiting the Euro.

- This state of affairs, TMM believe, is entirely unsustainable. Given the drastic recession that is about to occur, government debt will blow out again, requiring a further bailout in 6months. Germany has declared that there will be no more money. Cyprus would then have to leave the Euro *anyway*.

- TMM used to have a German boss many years ago who once described German foreign policy as such : "You throw in a hand grenade, wait for the dust to settle and walk straight through. Don't even bother counting the bodies". They appear to be sticking to their rule book. But then, what else would you expect from Germany?

- TMM think that the Rest of World is numbed to Euroblx and is happy using the "just muddle through" model to trade on, having been severely roasted last year expecting the opposite.

- TMM think this creates a more dangerous environment for markets as complacency levels with respect to Europe are at levels not seen for some time.